This blog is created as a basis for class discussion. Posting are by the students of Competitive Strategy at the Graduate School of Business of the University of Chicago. Analysis and comments are written by students and do not necessarily reflect the views of Professor Garicano or the Graduate School of Business.

Monday, May 02, 2005

Macromedia Flashes, Adobe Proposes

Adobe Systems (Nasdaq: ADBE) announced its intention to acquireMacromedia (Nasdaq: MACR) on April 19th in an all-stock transaction valued at approximately $3.4 billion. Adobe has been known for its world-leading digital imaging, design, and document applications such as Photoshop and Acrobat. Macromedia’s strength resides on developing visually appealing and functional sites on the Internet, fixed media, wireless, and digital devices. Some of its world renowned applications include Flash and Dreamweaver. The combination of the company’s powerful development, authoring and collaboration tools and the complementary functionality of PDF and Flash will offer the new company the ability to push through its standards in different platforms and deliver compelling, rich content and applications across a wide range of devices and operating systems.Adobe and Macromedia share a similar business model. Like the Acrobat document reader, the Flash player is distributed free and is present on almost 98% of all desktop computers that are connected to the internet. The companies then charge developers for the software needed to create files that can take advantage of their large consumer base. The acquisition allows both companies to plug holes in their product offerings. Macromedia's Flash, the de facto web animation standard, when combined with Adobe's PDF e-document format and the authoring tools that go with both tools, will position the merged company as a powerhouse for graphics and publishing, both physical and electronic, going forward. The acquisition will enable the ‘new’ Adobe to streamline costs as overlapping product offerings and redundant job functions are phased out. Also, new synergies will be created by combining each company’s production, marketing, and sales operations.The acquisition comes in the heals of other mergers in the software industry over the past year. These include Oracle’s merger with PeopleSoft and Retek, Symantec’s acquisition of Veritas, and Computer Associates buyout of Concord Communications. In light of these mergers and to maintain a viable force in the market, Adobe had to act. Currently, the industry is fairly fragmented with a number of players providing direct and indirect competition to Adobe. These include Corel, Apple, ArcSoft, Avid, Broderbund, Cyberlink and others; however, its most challenging competitor is Microsoft. In describing it, Bruce Chizen, CEO of Adobe Systems, summed up it up by saying, “when I think about competitors, there’s only one I really worry about. and it’s one that happens to have $35 billion in revenues and $50 billion in the bank. And it happens to be in the software business. Microsoft is the competitor, and it’s the one that keeps me up at night.” There’s evidence that Microsoft is replicating some of Adobe’s popular features. The next version of its operating system will have features that use dynamic document-like activities like those used in Adobe Acrobat. Macromedia’s former CEO, Robert Burgess, explained in an interview with Knowledge@Wharton in October that the company “didn’t have the girth to compete with larger companies”. Despite its recognized products, Macromedia would likely not have been able to survive as an independent player for much longer. The merger was born out of necessity for both companies.Adobe’s CEO, Bruce Chizen, explained that much of the impetus for the deal revolved around targeting new markets such as mobile phones. In the past few years, the mobile phone market has become very attractive, growing 36.7% year-over-year according to IDC. The combined companies will be well positioned to capitalize on this growth. Although both company’s products are weighted towards the PC software market, Macromedia has developed a generation of applications targeting new platforms, such as the growing mobile phones market. Flashlite, for example, offers interactive content over mobile phones. As new generation mobile phones are rolled out and new services are provided, content will have to be developed. This is a key revenue driver for cell phone manufacturers. The acquisition permits Adobe to capitalize on Macromedia’s strength in this area, allowing it to diversify away from the PC software market and tapping into new sources of revenue. It will be able to capitalize on the sector’s growth by licensing its technology to the phone makers. NTT DoCoMo, a major handset provider, for example, has already embedded Macromedia’s Flash application and Adobe’s Acrobat Reader in its phones. By bundling their technology platforms, the combined company will be able to target new customers in the mobile handset market; however, its challenge is becoming a standard in the mobile phone industry. With other standards (ie Java) vying for leadership, it’s not yet clear whether Adobe will be able to establish itself as a standard in this space. According to Kevin Werbach, professor at Wharton, “there are so many different platforms in the mobile phone space,if there is anything that's a standard, it's Java and Flash, but the challenge is finding ways to monetize that."Although tapping into the mobile phone is the main driver behind the acquisition, there are other obvious reasons. For starters, both companies cater to similar audiences. Their target clients tend to be web designers, graphic artists, and web publishers. The combined company will continue targeting this same group of people but with the ability to offer bundling opportunities on its products giving it upside sales potential. Both companies also share cultural similarities. Each is a fast growing software companies with a deep entrepreneurial drive and a record for innovation.The merger between Adobe and Macromedia seems like a natural move for both companies. Given the increased merger mania in the software industry, stiff competition, and natural complementariness of both companies products, Adobe has no choice but to do the same. Forgoing any regulatory problems, both companies stand to gain a lot from the merger.Submitted by Alex Viergutz, Matthew Koch, and Anand Kamannavar